The Seventh Circuit Court of Appeals held that when an insured sues an insurer an injured party named as a defendant may be dismissed by the Court of Appeals to preserve subject matter jurisdiction. In Altom Transport, Inc. v. Westchester Fire Ins. Co. 823 F.3d 416 (7th Cir. 2016) an insured filed a declaratory judgment in state court seeking coverage in a suit by a third party who claimed he was owed money. The insurance carrier removed the suit to federal court. In addition to the insurance carrier the insured also had named the third party because it believed it was required to name as a defendant any party with a stake in the insurance policy proceeds. However, since the insured plaintiff and the third party named as a defendant were citizens of the same state the court considered whether this lack of diversity deprived it of subject matter jurisdiction.
The Court of Appeals pointed out that the Supreme Court had endorsed the rule under which even a Court of Appeals may dismiss disposable, non-diverse parties to preserve subject matter jurisdiction the court then recognized that under Illinois law an injured party is indispensable when an insurer sues an insured for a declaratory judgment defining coverage but then said:
“But when an insured sues an insurer, the insured can represent both its own interests and the interests of the third party and thereby obviate the need to join the injured third party. See id, see also Winklevoss Consultants, Inc. v. Fed. Ins. Co.”, 174 F.R.D. 416, 418 (N.D. Ill. 1997) (explaining this rationale).”
The Court then ordered the third party dismissed from the action and proceeded to the merits of the case.